3 stupid budget tricks that will solve nothing

Commentary: Some ideas about cutting our debts don’t add up

WASHINGTON (MarketWatch) — Everyone knows the United States has a big budget problem over the next 10 or 20 or 30 years. But many of the solutions being offered by politicians will do little to fix the problem.

They are offering up gimmicks that seem fine only until you look at them closely; they are designed to appeal politically or emotionally, not to make sense fiscally. They are gimmicks because they don’t add up and because they assume that we can just wave a magic wand and make substantive disagreements disappear without a trace.

Here are three top budget gimmicks that sound great to some, but which don’t fix our problems.

1. Defaulting on the debt

Republican leaders John Boehner and Mitch McConnell say they’ll force the government to default on its debt for the first time unless Democrats agree to specific budget cuts as part of a deal to raise the legal debt limit. The showdown could come in the first week of August.

‘Obama has failed America’

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Former Massachusetts Gov. Mitt Romney kicks off his presidential campaign in New Hampshire with a sharp critique of President Obama.

This is an insane idea cooked up by political consultants who can count votes but not dollars. Assuming they are willing to go through with their threat, it’s simply terrorism — a sort of tea-party suicide bomb.

Both parties have played games with the debt ceiling, but never has anyone suggested out loud that default is really an option. Until now.

Default would make our problems immeasurably worse. Our borrowing costs would soar, and no one has quite explained how that would make our debts more affordable. Moody’s said Thursday that it might downgrade our debt (making it more expensive for us to borrow) if there were just a chance of default. Imagine the costs if we actually reneged on our promises. Read our full story about Moody’s warning on U.S. debt.

Remember, the government doesn’t spend a penny that Congress hasn’t already authorized. Congress gets a chance every year to stop the spending or to change course, but it doesn’t. That’s the time to decide how much to spend, how much to tax.

Darrell Issa

House Speaker John Boehner is on the left, President Obama on the right.

But now Republicans in Congress want to take a mulligan and refuse to pay up when the bill comes due. If a husband and wife were arguing over the family budget, would you advise them to stop paying their bills until they came to an agreement? Would that help their credit rating?

A debt crisis lasting more than a day or two would likely cause a global financial deluge that would make 2008 seem like a spring shower. Default would prove to the world and our creditors that our political system is so dysfunctional that we’ll never get our fiscal house in order. Which part of this is better than continuing to negotiate through the political process?

2. Putting a cap on government spending

Democratic Sen. Claire McCaskill and Republican Sen. Bob Corker have proposed that federal spending be limited to 20.6% of gross domestic product. Spending would be automatically cut if the limit were breached. This is a variation of the balanced-budget amendment, which assumes that we are too dumb or weak to do the right thing on our own.

This sounds like a great idea until you think about it. Then the flaws become obvious.

Restricting spending to a set percentage of GDP is a terrible idea because it supposes that we know now what are children will need in 10 or 20 or 30 years.

Why 20.6%? Why not 18%, as several Republican congressmen propose? Why not 50%? How do we know what the optimal level of government spending is? It might change over time. We spent 44% of GDP in 1943 and 1944 to defeat Hitler; money well spent, in my view. Our national needs change, and so should our budget. In the future, we’ll have many more seniors who’ll need Social Security and Medicare. Should they be denied what was promised to them because of some arbitrary limit imposed by some forgotten Congress?

The government spent more than 20.6% of GDP every year from 1980 to 1995, and the economy did not seem to suffer too badly. If it was good enough for Ronald Reagan, it ought to be good enough for us!

Furthermore, putting a cap on spending would only encourage politicians to hide spending as special tax breaks to the favored few. These tax expenditures are already way out of control without giving Congress additional incentives to add to them. Read my column on tax expenditures.

3. Means-testing Social Security benefits

Republican presidential candidate Tim Pawlenty says he’ll go to Florida and dish out some “tough medicine” by speaking the truth that no one else will: That “we’re going to have to means-test Social Security’s annual cost of living adjustment.”

Pawlenty needs to do the math. Limiting the benefits received by wealthy retirees would do almost nothing to balance the budget. You’ve got to remember that Social Security benefits are already extremely progressive; that is, poor people get a larger share of their pre-retirement income in Social Security benefits than rich people do.

And you also have to remember that the special thing about rich people is how rare they really are. There aren’t enough of them to make a difference to Social Security’s finances.

More than 90% of Social Security benefits go to people who earn less than $50,000 a year in outside income. Only 1.2% of benefits go to people who make more than $120,000 a year. Even if you eliminated their benefits entirely (which Pawlenty is not advocating), you wouldn’t save enough money to put the system in the black, especially considering it would cost as much to enforce a means test as it would save.

More gimmicks

There are plenty more budget gimmicks that the politicians will tout. There’s that old standby: “Tax cuts pay for themselves.” Or what about the old saying about eliminating “waste, fraud and abuse.” And don’t forget 2008’s greatest hit: “No more earmarks.”

The reality is that bringing the debt down isn’t easy, or it would have already been done. Both parties will have to compromise a lot, and some sacred cows will be slaughtered. Entitlement benefits will be adjusted, tax breaks will need to be restricted and tax rates will have to go up. Even the military will feel the heat.

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